Module 3

INTANGIBLE ASSETS

Chapter 31 Intangible Assets (Goodwill)

Chapter 32 Identifiable Intangible Assets
Chapter 33 Research and Development Cost (Computer Software)

Valix, Peralta, Valix

CHAPTER 31:
INTANGIBLE ASSETS (Goodwill)
Technical Knowledge:
•  To know the criteria in defining an intangible asset.
•  To know the initial and subsequent measurement of an
intangible asset.
•  To understand amortization and impairment of
intangible assets.
•  To understand the nature of goodwill as an intangible
asset.
•  To know the residual approach of measuring goodwill.
•  To know the direct approach of measuring goodwill.
CHAPTER 31:
INTANGIBLE ASSETS (Goodwill)
Topics:
1.  Initial Measurement of Intangible Asset (Cost)
2.  Subsequent Measurement of Intangible Assets
a.  Cost Model
b.  Revaluation Model
3.  Amortization of Intangible assets
4.  Impairment of Intangible Assets
5.  Derecognition of an Intangible Asset
6.  Disclosures related to Intangible Assets
7.  Goodwill
Intangible Assets

Intangible Assets
•  PAS 38
•  An identifiable nonmonetary asset without physical
substance and must be controlled by the entity as a
result of past event and from which future economic
benefits are expected to flow to the entity.
•  Essential Criteria:
•  Identifiability
•  Control
•  Future Economic Benefits
Intangible Assets

Identifiability
•  To distinguish it clearly from Goodwill.
•  An asset is identifiable when:
•  It is Separable
•  Capable of being separated from the entity and sold,
transferred, licensed, rented or exchanged, either
individually or together with a related asset or
liability.
•  It arises from Contractual or Other Legal Rights
Intangible Assets

Control
•  Power of the entity to obtain the future economic
benefits flowing from the intangible asset and restrict
the access of others to those benefits.
•  Legal rights
•  No Control:
•  Skill of employees
•  Market Share
•  Customer loyalty
Intangible Assets

Future Economic Benefits

•  Revenue from sale of products or service
•  Cost savings or other benefits such as reduction in
future production costs
Intangible Assets

Recognition of Intangible Asset

•  It is Probable that future economic benefits attributable to
the asset will flow to the entity.
•  The cost of the intangible asset can be Measured Reliably.

•  Based on judgment from external evidences

•  Degree of certainty of the future economic benefits
Intangible Assets

Initial Measurement of Intangible Asset

•  Initially: Cost
•  The Cost depends on the following:
a.  Separate acquisition
b.  Acquisition as part of business combination
c.  Acquisition by way of a government grant
d.  Acquisition by exchange
e.  Acquisition by self-creation or internal generation
Intangible Assets

Separate Acquisition
•  Purchase price
•  Import duties and nonrefundable purchase taxes
•  Directly attributable costs of preparing the asset for the
intended use
•  Cost of employee benefits arising directly from
bringing the asset to its working condition.
•  Professional fees arising directly from bringing the
asset to its working condition.
•  Costs of testing whether the asset is functioning
properly.
Intangible Assets

Separate Acquisition
•  Payment is deferred beyond normal credit terms:
Cash Price Equivalent
•  Difference between the cash price equivalent and the
total payments is recognized as Interest Expense
over the credit period.
Intangible Assets

Separate Acquisition
Cost which are Not Capitalizable
•  Expensed:
a.  Costs of introducing a new product or services,
including costs of advertising and promotional activities.
b.  Costs of conducting business in a new location or with
a new class of customer, including costs of staff training.
c.  Administrative and other general overhead costs
d.  Costs incurred while an asset capable of operating in a
manner intended by management has yet to be brought
into use.
e.  Initial Operating Losses
Intangible Assets

Acquisition as Part of Business Combination

•  Based on Fair Value on date of acquisition.
•  Refer to hierarchy of FV
Intangible Assets

Acquisition by Government Grant

•  Free of charge or for nominal consideration
•  Airport land rights
•  Operate Radio and TV stations Licenses
•  Import License
•  Initially recorded either:
•  Fair Value
•  Nominal amount or zero (0), plus any expenditure
that is directly attributable to preparing the asset for
its intended use.
Intangible Assets

Acquisition by Exchange
•  Exchange for a nonmonetary asset or a combination of
monetary asset and nonmonetary asset.
•  Initially recorded:
•  FV of the asset given up + Cash payment
•  CV of the asset given up (Lacks commercial
substance) + Cash payment
Intangible Assets
Acquisition by self-creation or internal generation
•  Cost of Internally Generated Intangible Assets
comprises all directly attributable costs necessary to
create, produce, and prepare the asset to be capable of
operating it in the manner intended by management
•  Examples:
•  Cost of materials and services used or consumed in
generating the intangible asset
•  Cost of employee benefits arising from the generation of
the intangible asset
•  Fees to register a legal right
•  Amortization of patents and licenses that are used to
generate the intangible asset
Intangible Assets

Acquisition by self-creation or internal generation

•  Exclude:
•  Selling and administrative and other general overhead
•  Inefficiencies and initial operating losses
•  Cost of training staff to operate the asset

•  Internally generated brands, mastheads, publishing titles,

customer lists and similar items in substance shall not be
recognized as Intangible Assets. (Expensed)
Intangible Assets

Recognition as an Expense
1.  Expenditure does not meet the criteria for recognition.
a.  Start-up costs / preopening costs / organization
costs
b.  Training costs
c.  Advertising and promotional costs
d.  Business relocation and reorganization costs

2.  Expenditure that was initially recognized as expense.

3.  Prepayments and later on become expense.

Intangible Assets

Subsequent Expenditure
•  General Rule: Expense, unless it satisfied the recognition
criteria.
•  Usually for maintaining the expected future economic
benefits.
•  Not possible to determine whether it is likely to enhance
the economic benefits.
Intangible Assets

Identifiable Intangible Assets

1.  Patent
2.  Copyright
3.  Franchise
4.  Trademark or brandname
5.  Leasehold or lease right
6.  Computer software
7.  Broadcasting License, Airline Right, Fishing Right
Intangible Assets

Unidentifiable Intangible Assets

•  It cannot be sold, transferred, licensed, rented or
exchanged separately.
•  Inherent in business as a whole
•  Example: Goodwill
Intangible Assets

Classification of Intangible Assets

1.  Intangible Assets with Definite Life
•  Patent, copyright, franchise with fixed terms,
computer software, customer list, and license.
2.  Intangible Assets with Indefinite Life
•  Goodwill, trademark, and perpetual franchise.

Subsequent Measurement of Intangible Assets

•  An entity shall choose as an Accounting Policy, Either:
•  Cost Model
•  Revaluation Model
Intangible Assets

Amortization of Intangible assets

•  Amortization is the systematic allocation of the
amortizable amount of an intangible asset over the
useful life.
•  Amortizable amount = Cost Less Residual Value
•  Limited or finite life: Amortized over their Useful Life
•  Indefinite life: Not Amortized but tested for impairment
at least annually or whenever there is an indication
Amortization of Amortization Expense XXX
Intangible Asset Intangible Asset / Accum. Amort. XXX
Intangible Assets

Amortization Period
•  Begin: Available for Use or asset is in the location and
condition for the intended use
•  Cease: Derecognized or classified as “Held for sale”
Intangible Assets

Useful Life
•  Assess whether Indefinite or Finite
•  Finite
•  Expressed in terms of years or number of units to
be produced.
•  Indefinite
•  No foreseeable limit to the period over which the
asset is expected to generate net cash flows.
•  Factors affecting useful life:
a.  Technical, technological, commercial or other types of
obsolescence
Intangible Assets

Useful Life
•  Factors affecting useful life:
b.  Expected actions by competitors or potential competitors
c.  Expected usage of the asset by the entity
d.  Typical product life cycles for the asset
e.  Stability of the industry in which the asset operates
f.  Level of maintenance expenditure required to obtain the
expected future economic benefits from the asset
g.  The useful life of the asset is dependent on the useful life
of other assets of the entity
h.  Period of control over the asset and legal or similar limits
on the use of the asset, such as the expiry dates of
related leases
Intangible Assets

Amortization Method
•  Reflect the pattern in which the future economic benefit
from the asset are expected to be consumed by the entity.
•  Pattern cannot be determined reliably:
Use Straight Line Method

Change in Amortization Method and Useful Life

•  Reviewed at each financial year-end.
•  Change in Accounting Estimate:
Currently and prospectively
Intangible Assets

Residual Value
•  Presumed to be Zero
•  Except:
•  Third Party committed to buy the intangible asset at
the end of its useful life.
•  Active market for the intangible asset
•  Reviewed at each financial year-end
•  Change in residual value
•  Change in Accounting Estimate:
Currently and prospectively
Intangible Assets

Impairment of Intangible Assets

•  Impairment Loss: RA < CV
•  Recoverable amount is Higher between FV-COD and
VIU
•  Limited or finite life:
•  Tested for impairment whenever there is an indication
of impairment at end of reporting period.
•  Indefinite life:
•  Tested for impairment at least annually and whenever
there is an indication of impairment.
Intangible Assets

Derecognition of an Intangible Asset

•  Derecognized or eliminated from the books:
1.  On disposal of the asset
2.  When no future economic benefits are expected
from its use and disposal
•  Gain or Loss = Net disposal proceeds – CV of
intangible assets

Disclosures related to Intangible Assets (PAS 38)

Goodwill

Goodwill
•  Most Intangible of all intangible assets.
•  Standing alone cannot be bought and sold.
•  Can only be identified with the entity as a whole.
•  Not specifically identifiable, has Indeterminate life,
Inherent in continuing business as a whole.
Goodwill

Goodwill
•  Goodwill arises when earnings exceed normal earnings
by reason of:
•  Good name
•  Capable staff and personnel
•  High credit standing
•  Reputation for fair dealings
•  Reputation for superior products
•  Favorable location
•  List of regular customers
Goodwill

Goodwill
•  Created by Good relationship between an entity and
its customers:
•  By building up a reputation by word of mouth for
high quality products or high standard of service.
•  By responding promptly and helpfully to queries
and complaints of customers.
•  Through the personality of the staff and their
attitude to the customers.
•  Changes from day to day (damage or improve)
Goodwill

Recognition of Goodwill
1.  Developed or Internal Goodwill: Not Recorded
2.  Purchased Goodwill: Asset
•  When a business is purchased by the entity. (Paid for)

Measurement of Goodwill
•  Simply record the Goodwill in the books of the new
business or acquirer.
•  2 Approaches:
1.  Residual Approach
2.  Direct Approach
Goodwill

Residual Approach
•  Goodwill = Purchase Price – (Total Assets excluding
Goodwill – Total Liabilities)
•  Net Assets (Assets less Liabilities) must be measured
at Fair Value.
Purchase Price XXX
FV of Net Assets acquired, excl. GW -XXX
Goodwill XXX

Illustration – Residual Approach:

REFER TO BOOK PAGE 909.
Goodwill
Residual Approach (Example)
An entity purchased another entity for P9,000,000 cash.
The assets and liabilities of the acquired business
measured at Fair Value are as follows:
Assets
Cash P500,000
Accounts Receivable 1,500,000
Inventory 2,500,000
PPE 4,000,000
Patent 1,300,000 P9,800,000
Liabilities
Accounts Payable 1,600,000
Notes Payable 1,000,000
Accrued Liabilities 200,000 2,800,000
Net assets at FV P7,000,000
Goodwill
Residual Approach (Example)
Purchase Price P9,000,000
FV of Net Assets acquired, excl. GW (7,000,000)
Goodwill P2,000,000

Cash 500,000
Accounts Receivable 1,500,000
Inventory 2,500,000
PPE 4,000,000
Patent 1,300,000
Goodwill 2,000,000
Accounts Payable 1,600,000
Notes Payable 1,000,000
Accrued Liabilities 200,000
Cash 9,000,000
Goodwill

Goodwill in a Business Combination

(Advanced Accounting)
•  Residual approach is used.

Consideration transferred XXX

Amount of Noncontrolling Interest in the Acquiree XXX
FV of previously held interest in the Acquiree XXX
Total XXX
FV of Net Assets assumed, excluding GW -XXX
Goodwill XXX
Goodwill

Direct Approach
•  Basis of future earnings of the entity.
•  Systematic and logical way of measuring goodwill
(Future earnings exceed normal earnings)
•  Requires the following information:
•  Normal Rate of Return in the industry
•  Rate of return which usually attracts investors in a
particular industry.
•  FV of Tangible Assets and any Identifiable Intangible Assets.
•  Estimated future normal earnings of the entity.
•  Probable duration of any “Excess Earnings” attributable to
Goodwill.
Goodwill

Direct Approach
•  Methods:
1.  Purchase of “Average Excess Earnings”
2.  Capitalization of “Average Excess Earnings”
3.  Capitalization of “Average Earnings”
4.  Present Value Method

Illustration – Direct Approach:

REFER TO BOOK PAGE 911 to 912.
Goodwill

Direct Approach (Example)

The following data are available in relation to the
computation of Goodwill:
Net Assets, Excluding Goodwill P7,500,000
Normal Rate of Return in the industry 12%
2016 P950,000
2017 975,000
2018 950,000
2019 1,075,000
2020 1,050,000
P5,000,000
/5
Average Earnings of the 5-year period P1,000,000
Goodwill

Method 1 – Purchase of “Average Excess Earnings”

The Goodwill is measured at average excess earnings
for 5 years.
Average earnings P1,000,000
Normal earnings (12% x P7.5M)* (900,000)
Average Excess Earnings 100,000
No. of years 5
Goodwill P500,000

*Normal rate of 12% is applied on net assets, excluding

goodwill.
Goodwill

Method 2 – Capitalization of “Average Excess Earnings”

The Goodwill is measured at average excess earnings
capitalized at 25%.
Average excess earnings P100,000
Capitalization Rate /25%
Goodwill P400,000
Goodwill

Direct Approach (Example)

The following data are available in relation to the
computation of Goodwill:
Net Assets, Excluding Goodwill P7,500,000
Normal Rate of Return in the industry 12%
2016 P950,000
2017 975,000
2018 950,000
2019 1,075,000
2020 1,050,000
P5,000,000
/5
Average Earnings of the 5-year period P1,000,000
Goodwill

Method 3 – Capitalization of “Average Earnings”

The Goodwill is measured at average earnings
capitalized at 10%.
Average earnings P1,000,000
Capitalization Rate /10%
Net Assets, including GW or Purchase Price 10,000,000
Net Assets, excluding GW (7,500,000)
Goodwill P2,500,000
Goodwill

Method 4 – Present Value

•  Goodwill is the Discounted value or Present Value of the
Average Excess Earnings that are expected to become
available in future periods.

The Goodwill is measured at average excess earnings for

5 years. Assuming a discount rate of 12% with
PV factor of 3.605.
Average excess earnings P100,000
PV of an ordinary annuity of 1 for 5 years at 12% 3.605
Goodwill P360,500
Goodwill

Impairment of Goodwill
•  Indefinite Useful Life
•  No Amortization of Goodwill but tested for impairment
at least annually and whenever there is an indication.
•  Tested at the operating segment or any lower level.
Goodwill

Negative Goodwill
•  Purchase Price or Consideration transferred < Fair
Value of Net Assets
•  No more “Negative Goodwill” account
•  Gain on Bargain Purchase

Purchase Price XXX

FV of Net Assets -XXX
Gain on Bargain Purchase -XXX

Illustration – Negative Goodwill:

REFER TO BOOK PAGE 913.
Goodwill

Negative Goodwill (Example)

An entity purchased an ongoing business for P8,000,000
cash. The assets and liabilities of the acquired business
measured at FV are as follows:
Cash P500,000
Accounts Receivable 2,000,000
Inventory 2,500,000
Land 3,000,000
Property and Equipment 6,000,000
Accounts Payable (1,000,000)
Bonds Payable (4,000,000)
Net Assets at FV P9,000,000
Goodwill

Negative Goodwill (Example)

Purchase Price P8,000,000
FV of Net Assets (9,000,000)
Gain on Bargain Purchase (P1,000,000)
Cash 500,000
Accounts Receivable 2,000,000
Inventory 2,500,000
Land 3,000,000
Property and Equipment 6,000,000
Accounts Payable 1,000,000
Bonds Payable 4,000,000
Cash 8,000,000
Gain on Bargain Purchase 1,000,000
Assignment / Exercises
Answer the following Textbook problems (5pts):
•  31-5
END OF CHAPTER 31
J
CHAPTER 32:
IDENTIFIABLE INTANGIBLE ASSETS
Technical Knowledge:
•  To understand the meaning of patent and trademark
•  To identify the items chargeable to the cost of patent
and the cost of trademark.
•  To understand the amortization and impairment of
patent and trademark.
CHAPTER 32:
IDENTIFIABLE INTANGIBLE ASSETS
Technical Knowledge:
•  To understand the nature of copyright, franchise,
leasehold, leasehold improvement, license, and
customer list.
•  To know the amortization and impairment of copyright,
franchise, leasehold, leasehold improvement, license,
and customer list.
•  To know the accounting treatment of organization cost,
including start-up cost.
CHAPTER 32:
IDENTIFIABLE INTANGIBLE ASSETS
Topics:
1.  Patent
2.  Trademark
3.  Copyright
4.  Franchise
5.  Leasehold
6.  License and Right
7.  Customer List
8.  Organization Cost
9.  Website Development Cost (Expensed)
10. Computer Software
Identifiable Intangible Assets

The common identifiable intangible assets are:

1.  Patent
2.  Trademark
3.  Copyright
4.  Franchise
5.  Leasehold
6.  License and Right
7.  Customer List
8.  Computer Software
Patent

Patent
•  a government authority or license conferring a right or title
or control for a set period, especially the sole right to
exclude others from making, using, or selling an invention.

•  Legal Life: 20 years Non-renewable (R.A. 8293 or the

Intellectual Property Code of the Philippines Jan. 1,
1998)

•  Technology-related
Patent

Cost of Patent
1.  Acquired Patent (Intangible Asset)
a.  Purchase price
b.  Import duties
c.  Nonrefundable purchase taxes
d.  Any directly attributable cost of preparing the
asset for the intended use
Patent

Cost of Patent
2.  Internally generated
a.  Licensing and other related Legal Fees in securing
the patent rights (Intangible Asset)
i.  Patent is Technically and Commercially Feasible
ii.  Patent Application has been made:
1.  Engineering and consulting costs to develop the
patent
2.  Cost of design changes required by Patent
authority
b.  Research and development cost (Expensed)
Patent

Cost of Litigation
1.  Cost of Successfully prosecuting or defending a
patent. (Expensed)
2.  Cost of Not Successfully prosecuting or defending a
patent. (Expensed)
Patent

Amortization of Patent
•  Original Cost
•  Amortized over the Legal Life or Useful Life,
whichever is Shorter

•  Acquired a Competitive Patent to protect the original

patent
•  Amortized over the Remaining Life of Old Patent
Patent

Amortization of Patent
•  Acquired a Related Patent to extend the life of old Patent
•  Amortized over the Extended Life
•  No extension of life
•  New Patent: Amortized over its own life
•  Old Patent: Amortized over the remainder of its life

Acquired Patent
•  Cost shall be Amortized over the Legal Life or Useful
Life, whichever is Shorter
Patent

Illustration – Patent: REFER TO BOOK PAGE 931 to 932.

Date January 1, 2020
Cost of developing a patent P200,000
Cost of licensing a patent 120,000
Useful Life 20 years

Date January 1, 2022

Cost of Successful Defense P180,000

Date January 1, 2023

Purchased a Competing Patent P170,000
Useful life of Competing Patent 18 years
On December 31, 2023, the Government shut down the sale of the Patent due
to potential hazard of the product.
Patent

Illustration – Patent: REFER TO BOOK PAGE 931 to 932.

Date January 1, 2020
Cost of developing a patent 200,000
Cost of licensing a patent 120,000
Useful Life 20 years
Development of Patent R & D Expense 200,000
Cash 200,000

Cost of Licensing a Patent Patent 120,000

Cash 120,000

Amortization of Patent Amortization (Patent) 6,000

(2020 to 2022) Patent 6,000
Patent

Illustration – Patent: REFER TO BOOK PAGE 931 to 932.

Date January 1, 2022
Cost of Successful Defense 180,000

Cost of Successfully Legal Expenses 180,000

defending a Patent Cash 180,000
Patent

Illustration – Patent: REFER TO BOOK PAGE 931 to 932.

Date January 1, 2023
Purchased a Competing Patent 170,000
Useful life of Competing Patent 18 years

Acquisition of Patent 170,000

Competing Patent Cash 170,000

Amortization of Patent Amortization (Patent) 16,000

and Competing Patent Patent 16,000
Amortization 1 P6,000
Amortization 2 (170,000 / 17) 10,000
Total Amortization P16,000
Patent

Illustration – Patent: REFER TO BOOK PAGE 931 to 932.

On December 31, 2023, the Government shut down the
sale of the Patent due to potential hazard of the product.
Write-off the Patent Patent written off 256,000
(Other Expense) Patent 256,000

Patent
P120,000 P6,000
170,000 6,000
6,000
16,000
256,000
P-
Patent

Impairment of Patent
•  Patents: Finite Useful Life. Cost shall be Amortized.
•  Tested for impairment whenever there is an indication
of impairment at the end of reporting period.
CV of Patent XXX
PV of Cash flows or Value in Use -XXX
Impairment Loss XXX

Impairment of Patent Impairment Loss XXX

Patent XXX
Illustration – Impairment of Patent:
REFER TO BOOK PAGE 933.
Trademark

Trademark
•  Trade name, Brand name
•  Words, phrase, symbol, sign, slogan, or name used to
mark a product to distinguish it from other products.
•  Legal Life: 10 years Renewable
•  Market-related
Trademark

Cost of Trademark
1.  Acquired Patent (Intangible Asset)
a.  Purchase price
b.  Any directly attributable cost to the acquisition

2.  Internally generated

a.  Expenditures required to established it (Intangible
Asset)
i.  Filing Fees
ii.  Registry Fees and Other fees related in securing
the trademark
iii.  Design Cost
Trademark

Cost of Litigation
1.  Cost of Successfully prosecuting or defending the
trademark. (Expensed)
2.  Cost of Not Successfully prosecuting or defending the
trademark. (Expensed)
Trademark

Amortization of Trademark
•  R.A. 8293 or The Intellectual Property Code of the
Philippines: 10 Years, renewable

•  Usually, Indefinite useful life

•  Intention to renew trademark continuously and
ability to do so
•  Net cash inflows indefinitely
•  No Amortization, but subject to test for impairment
at least annually
Trademark

Amortization of Trademark
•  With Finite useful life
•  Amortized over the remaining useful life
•  Test for impairment when there is an indication of
impairment at end of period

Impairment of Trademark
•  Finite or indefinite useful life must be tested for
impairment whenever there is an indication of
impairment at the end of reporting period.
Trademark

Illustration – Trademark: REFER TO BOOK PAGE 935.

Trademark P3,000,000 CV of Trademark P3,000,000
Legal Life 8 Years Value in Use 2,500,000
Amortization ??? Impairment Loss P500,000
VIU 2,500,000

Acquisition Trademark 3,000,000

Cash 3,000,000

Impairment of Impairment Loss 500,000

Trademark Trademark 500,000

Note: Computation of VIU (P250,000 / 10%).

Copyright

Copyright
•  Exclusive right granted by the government to the
author, composer or artist enabling the grantee to
publish, sell, or otherwise benefit from the literary,
musical or artistic work.
•  Intellectual Property Code of the Philippines: 50 years
after death
•  Artistic-related
Copyright

Cost of Copyright
•  All expenses incurred in the production of the work
including those required to establish or obtain the right.
(Intangible Asset)

•  Acquired Copyright
•  Cash plus directly attributable cost necessary for the
intended use
Copyright

Amortization of Copyright
•  Amortize over Useful Life or remaining Legal Life
whichever is Shorter.
•  Period in which benefits, sales, and royalties are expected.
•  Subject for impairment when there is an indication.
Franchise

Franchise
•  One party called the Franchisor grants certain rights to
another party called the Franchisee.
•  Contract-based (US GAAP)
•  Between Government and a Private entity or individual.
•  Use of public property in performing the services
•  Between Private entities or individuals.
•  Use the trademark, patent, and process of the franchisor
•  Definite or Indefinite period
Franchise

Franchise Cost
1.  Initial Franchise Fee (Intangible Asset)
a.  Lump Sum Payment plus
b.  Directly attributable cost such as legal fees and
expenses incurred.

2.  Periodic franchise fee (Expense)

a.  Periodic payment to franchisor
Franchise

Amortization of Franchise
•  Definite period: Amortized over useful life
•  Indefinite period: No amortization but tested for
impairment at least annually
Franchise

Franchise Accounting
•  Franchisee only
•  Franchisor (Advanced Accounting)

REFER TO BOOK PAGE 938 to 939.

Franchise

Illustration 1 – Franchisee Accounting

(Periodic Franchise Fee): REFER TO BOOK PAGE 938.

Franchisee pays the Franchisor a periodic fee of 5% of

gross sales of the franchisee each year. Franchisee’s
realized gross sales of P5,000,000 for the current year.

Periodic Franchise Fee Franchise Fee Expense 250,000

Cash 250,000

Franchise Fee Expense = P5,000,000 x 5%

Franchise Fee Expense = P250,000
 Franchise

Illustration 2 – Franchisee Accounting (Initial Franchise Fee,

Interest-bearing note): REFER TO BOOK PAGE 939.
On Jan. 1, 2020, an entity purchased a franchise from JFC to
sell Jollibee products for P5,000,000 for 20 years. The initial
franchise fee is payable in cash, P500,000, when the contract
is signed and the balance in 5 equal installments every year-
end, evidenced by a 12% promissory note.

The agreement provided that the franchisor would assist in the

location of site for the construction of building, make a project
study for the viability of the project and provide training of
management and employees. JFC has already performed
substantially all the services required under the contract.
Franchise

Illustration (Initial Franchise Fee, Interest-bearing note)

Initial Franchise Fee Franchise 5,000,000
Cash 500,000
Note Payable 4,500,000

First Installment Note Payable 900,000

Payment Interest Expense (P4.5M x 12%) 540,000
Cash 1,440,000

Amortization of Amortization of Franchise 250,000

Initial Franchise Fee* Franchise 250,000

*UL =20 years

Franchise
E.g. (Initial Franchise Fee, Noninterest-bearing note)
•  On Jan. 1, 2020, an entity purchased a franchise from
McDonald Company to sell for 20 years McDonald products
for P5,000,000. The initial franchise fee is payable in cash,
P500,000, when the contract is signed and the balance in 5
equal installments every year-end, evidenced by a
noninterest-bearing note.
•  The franchisee could borrow money at 12% and the PV of
ordinary annuity of 1 at 12% for 5 periods is 3.6048.
•  The agreement provides that the franchisor shall provide
the necessary initial services required under a franchise
contract. McDonald Company has substantially performed
all the initial services required under the contract.
Franchise

Illus. (Initial Franchise Fee, Noninterest-bearing note)

Down payment P500,000
PV of Note Payable (P0.9M x 3.6048) 3,244,320
Total Cost of Franchise P3,744,320

Note Payable P4,500,000

PV of Note Payable (3,244,320)
Implied Interest P1,255,680

Initial Franchise Fee Franchise 3,744,320

Discount on Note Payable 1,255,680
Cash 500,000
Note Payable 4,500,000
Franchise

Illus. (Initial Franchise Fee, Noninterest-bearing note)

Total Cost of Franchise = P3,744,320

Amortization of Amortization of Franchise 187,216
Initial Franchise Fee* Franchise 187,216

*UL =20 years

Franchise

Illus. (Initial Franchise Fee, Noninterest-bearing note)

Date Payment Interest Principal PV
Jan. 1, 2020 P3,244,320
Dec. 31, 2020 P900,000 P389,318 P510,682 2,733,638
Dec. 31, 2021 900,000 328,037 571,963 2,161,675
Dec. 31, 2022 900,000 259,401 640,599 1,521,076
Dec. 31, 2023 900,000 182,529 717,471 803,605
Dec. 31, 2024 900,000 96,395 803,605 -

First Installment Payment Note Payable 900,000

Cash 900,000

Amortization of Interest Expense 389,318

Discount on Note Payable Discount on Note Payable 389,318
Leasehold

Leasehold or Lease Right

•  Right acquired by the Lessee by virtue of a contract of
lease to use the specific property owned by the lessor
for a definite period of time in consideration for a
certain sum of money in the form of rent.
•  PFRS 16
•  Right of use asset and Lease Liability
Leasehold Improvement

Leasehold Improvement (PPE)

•  Alterations or modifications on the leased property made
by the lessee.
•  Buildings, walks, pavements, landscaping driveways
•  Legally, it will revert to the lessor upon termination of
the lease contract.
•  NOT Intangible assets but classified as PPE.
Leasehold Improvement

Depreciation of Leasehold Improvements

•  Depreciated over the lease term or useful life, whichever is
Shorter.
•  Residual value is ignored.
•  Lease contract terminated prior to end of lease term: Loss
Leasehold Improvement

Renewal Option
•  Too uncertain
•  Depreciated over the original lease term or useful
life, whichever is Shorter.

•  Highly probable or certain

•  Depreciated over the extended lease term or useful
life, whichever is Shorter.
Leasehold Improvement

Leasehold Improvements (Example)

An entity leased a piece of land on which a building is
constructed at a cash cost of P5,000,000. The useful life of
the building is 25 years. The terms of the lease provide that
the lessee shall pay P500,000 for lease rights and P50,000
monthly rental for a period of 20 years.
Construction of PPE Leasehold Improvement - PPE 5,000,000
Cash 5,000,000

Annual Depreciation* Depreciation 250,000

Accumulated Depreciation 250,000

*Shorter: Lease term of 20 years

License and Right

Broadcasting License
•  Indefinite Useful Life
•  License may be renewed indefinitely at little cost
and ability to do so.
•  Not amortized but tested for impairment annually or
if there is an indication.

•  Finite Useful Life

•  Licensing authority decided not to renew.
•  Amortized over remaining useful life and also
immediately tested for impairment.
License and Right

Airline Right
•  Acquired a Route Authority or an Airline Right
•  Routinely granted or renewed at little cost
(Indefinite useful life)
•  Not amortized but tested for impairment annually or if
there is an indication.
Customer List

Customer List
•  Customer database containing the name, contract
information, order history, and other vital and social
statistics (birth, death, and medical history)
•  Debatable Issue

•  Internally generated: Expensed

•  Acquired Customer List: Intangible Asset
•  Amortized over useful life and reviewed or assessed
for impairment.
Organization Cost

Organization Cost
•  Cost incurred in forming or organizing a corporation.
•  Expensed as incurred:
•  Legal Fees
•  Incorporation Fees

•  Deduction to Share Premium:

•  Stock Issuance Cost such as printing stock
certificates, cost of stock and transfer books, seal of
the corporation, underwriting and promotional fees,
accounting and legal fees in connection with issuance.
Website Development Cost

Website Development Cost (Expensed)

•  SIC 32: A website that has been developed for the
purpose of promoting and advertising an entity’s
products and service does not meet the requirement
to be recognized as an intangible asset.
Assignment / Exercises
Answer the following Textbook problems (5pts):
•  32-2
END OF CHAPTER 32
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CHAPTER 33: RESEARCH AND
DEVELOPMENT COST (Computer Software)
Technical Knowledge:
•  To understand the meaning of research.
•  To understand the meaning of development.
•  To identify research and development activities.
•  To know the proper treatment of research cost.
•  To know the proper treatment of development cost.
•  To identify the criteria for the recognition of
development cost as an intangible asset.
CHAPTER 33:
RESEARCH AND DEVELOPMENT COST
(Computer Software)
Technical Knowledge:
•  To know the recognition of an internally developed
computer software.
•  To know the amortization and impairment of computer
software.
CHAPTER 33:
RESEARCH AND DEVELOPMENT COST
(Computer Software)
Topics:
1.  Research Phase
2.  Development Phase
3.  R&D Recognition Criteria
4.  Acquired in-process R&D Project
5.  Computer Software
Research and Development Cost

Introduction
•  Research Phase and Development Phase
•  Assess whether an internally generated intangible
asset meets the criteria for recognition.

•  Cannot be distinguished: Research Phase only

Research and Development Cost

Research
•  Original and planned investigation undertaken with the
prospect of gaining new scientific or technical
knowledge and understanding.
•  Discover new knowledge
Research and Development Cost

Examples of Research Activities

•  Laboratory research aimed at obtaining or discovering
new knowledge.
•  Searching for application of research finding and other
knowledge.
•  Conceptual formulation and design of possible product
or process alternative.
•  Testing in search for product or process alternative.
Research and Development Cost

Accounting for Research Cost

•  Recognized as Expense when incurred.
•  Too much uncertainty (success and economic benefits).
Research and Development Cost

Development
•  Application of research findings or other knowledge
to a plan or design for the production of new or
substantially improved materials, devices, products,
processes, systems or services before the start of
commercial production or use.
Research and Development Cost

Examples of Development Activities

•  Design, construction, and testing of pre-production or
pre use prototypes and models.
•  Design of tools, jigs, molds and dies involving new
technology.
•  Design, construction, and operation of a pilot plant that
is not of a scale economically feasible for commercial
production.
•  Design, construction, and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services.
Research and Development Cost

Accounting for Development Cost

•  Incurred at a later stage in a project
•  Probability of Success may be apparent.
•  Expensed
•  Capitalized (Intangible Assets)

Prior to Commercial Production and Commercial

Distribution of a product or process Production
Research Development

All Expensed Expensed Capitalized

Research and Development Cost

Criteria for Recognition as Intangible Asset

Development Cost: If and only if the entity can
demonstrate ALL of the following (6):
1.  The technical feasibility of completing the intangible
asset so that it will be available for use or sale.
a.  Prototype or Model is produced
b.  Completed testing of the model
c.  Plans to file a patent application

2.  The intention to complete the intangible asset and

use or sell it.
Research and Development Cost

Criteria for Recognition as Intangible Asset

Development Cost: If and only if the entity can
demonstrate ALL of the following (6):
3.  The ability to use or sell the intangible asset.

4.  How the intangible asset will generate probable future

economic benefits.
a.  Existence of a market for the output of the
intangible asset or the intangible asset itself or,
b.  If it is to be used internally, the usefulness of the
intangible asset.
Research and Development Cost

Criteria for Recognition as Intangible Asset

Development Cost: If and only if the entity can
demonstrate ALL of the following (6):
5.  Availability of adequate technical, financial and
other resources to complete the development and to
use or sell the intangible asset.

6.  The ability to measure reliably the expenditure

attributable to the intangible asset during its
development.
Research and Development Cost

Research and Development Recognition Criteria

Prior to Commercial Production and Commercial
Distribution of a product or process Production
Research Development

All Expensed Expensed Capitalized (Strict Criteria 6)

1. Technical feasibility of completing
2. Intention to complete
3. Ability to use or sell
4. Probable future economic benefits
5. Availability of adequate resources
6. Ability to measure reliably
Research and Development Cost

Acquired in-process R&D Project

•  Recognition (Both Research and Development):
Asset at Cost.

•  Subsequent expenditures (R&D): Apply Recognition

Criteria
•  Expensed
•  Capitalized (added to CV of In-process R&D)
Research and Development Cost

Acquired in-process R&D Project

American Standard (AICPA FASB)

•  Expenditures for R&D which have alternative future
use, either in additional research project or for
productive purposes, can be Capitalized.
•  Subsequent expenditures:
•  Cost of materials used
•  Depreciation of PPE used in R&D
•  Amortization of Intangible asset used in R&D
Research and Development Cost

Activities Not considered Research and Development

•  Engineering follow through in an early phase of
commercial production.
•  Quality control during commercial production
including routine testing.
•  Trouble shooting breakdown during production.
•  Routine on-going effort to refine, enrich or improve
quality of an existing product.
Research and Development Cost

Activities Not considered Research and Development

•  Adaptation of an existing capability to a particular
requirement or customer need.
•  Periodic design changes to exiting products.
•  Routine design of tools, jigs, molds, and dies.
•  Activity, including design and construction engineering
related to construction, relocation, rearrangement or
start-up of facilities and equipment.
Computer Software

Internally Developed Computer Software

•  Cost incurred = Expense until Technical Feasibility
is established.
•  Technological Feasibility
•  Produced either a Detailed Program Design of
the Software or Working Model
•  After Technological Feasibility
•  Cost of Coding and Testing and Cost to Produce
Product Masters: Software Cost
•  Cost to actually produce the software from masters
and Package the software for sale: Inventory
 Computer Software
Computer Software
Until and After Technical
Research
Feasibility is established
(Detailed Program Design
or Working Model)

All Expensed Capitalized (Software Cost) Inventory

1. Cost of Coding and Testing 1. Actual production of
Software from Masters
2. Cost to Produce the
Product Masters. 2. Package the Software
for Sale
Computer Software

Amortization of Computer Software

•  Reflect pattern in which future economic benefits are
expected to be consumed by the entity.
•  Pattern cannot be determined reliably,
Use Straight Line method.

Amortization Amortization of Computer Software XXX

Computer Software XXX

Computer Software XXX

Accumulated Amortization -XXX
CV XXX
Computer Software

Impairment of Computer Software

•  Finite useful life
•  Amortized over useful life.
•  Tested for impairment when there is indication at end
of reporting period.
Computer Software

Classification of Computer Software

Computer Software
Classification Remarks
Intangible Asset General Rule
Inventory Purchased for Resale
PPE Purchased as Integral part of a computer
controlled machine tool that cannot operate
without specific software
Intangible Asset Not integral part of the related hardware.
Assignment / Exercises
Answer the following Textbook problems (5pts):
•  33-6
•  33-9
•  33-12
END OF CHAPTER 33
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